In response to COVID-19, financial services firms and online companies are offering a variety of self-made digital estate plans. These low-cost plans entice anxious families to explore these options in an effort to avoid the expense of an attorney. Not everyone has the ability to correctly prepare their own documents even with the convenience of the templates offered online. Others, who try on their own, could create problems rather than solutions. It is not easy to correctly prepare estate planning documents without the aid of an attorney, but it is easy to make significant mistakes which can be costly to correct or cause irreparable damage.
One of the most common mistakes involves the misinterpretation and misunderstanding of legal terms and their significance in legal documents. What is “issue”? What are “heirs at law”? What do “per capita” and “per stirpes” mean? Oftentimes, incorrect assumptions are made about the meaning of these words and others or they are ignored and dismissed as “legal jargon”, inadvertently leading to an estate plan contrary to the intent of the grantor or testator, such as leaving assets to unintended beneficiaries.
In like manner, the disinheritance clause and no-contest clause, while often very important, are frequently misconstrued. Additionally, in self-drafted documents, the language explaining why certain people are not included is absent, consequently increasing the chances of litigation after the grantor’s or testator’s death.
Similarly, the language used by online companies or clients themselves is often vague and unclear, resulting in unnecessary conflict and, frequently, in litigation that was intended to be avoided and could have been avoided if the estate planning documents were correctly drafted by an attorney in the first place. Likewise, a failure to tailor the estate plan in accordance with the particular state’s laws can lead to mistakes and unintended financial and personal consequences.
It is not uncommon that online or self-drafted documents fail to appreciate the various tax implications involved in a client’s estate or fail to consider all the issues associated with minor beneficiaries. Also, frequently, while changing a provision in a document, a change is implanted only in one part of the document, leaving other parts of the document impacted by this change unrevised and, subsequently, creating several probable interpretations and questions about the grantor’s or testator’s intent.
Online estate plans rarely contain all the documents that constitute a comprehensive estate planning portfolio. Similarly, it is very easy for an individual to fail to appreciate the role of each separate document and their importance and relevance in each specific case. For example, an online trust document might be missing a property schedule or the health power of attorney might not contain all of the individual’s wishes and desires.
Lastly, the online or self-execution of the estate planning documents often occurs without observing legal formalities such as notarization and the presence of competent witnesses. This absence of legal formalities consequently creates an invalid and inoperative document.
In today’s world, it is tempting to prepare an estate planning portfolio yourself or online. Be aware that by doing so, you might be creating more complications than resolutions. It is worth it to get your estate plan done right the first time by an attorney.
Estate planning is the process of setting up how your assets and property will be distributed upon your death. Through these plans, you can ensure your assets are given to the people and organizations you care about. Additionally, estate plans can minimize the amount of taxes your estate and family will incur once you’re gone. Estate planning is a necessary venture even for those who aren’t particularly wealthy, but it’s also a complicated one. Consider working with a financial advisor if you need help setting up an estate plan or managing inherited money.
What Is Estate Planning?
Estate planning is the series of preparation tasks that dictate how your assets will be dispersed upon your incapacitation or death. Put simply, estate planning means electing heirs for your estate.
Everything you own is part of your estate. That means property like real estate, in addition to cars and other valuables. Your estate also includes financial products, like stocks, bonds, life insurance, retirement savings and bank accounts. Things you share, like joint accounts, count too. Even if something only has sentimental value, you’ll want to specify its bequest. This ensures that your loved ones receive your assets instead of a probate lawyer or the IRS.
Estate planning entails far more than just creating a will. It may also include:
Assigning a power of attorney and healthcare proxy to make decisions on your behalf
Establishing guardians for living dependents
Appointing or updating beneficiaries on life insurance plans and retirement accounts
Making funeral arrangement
Preparing for estate taxes, potentially by scheduling annual gifting
Steps for Creating an Estate Plan
Before you begin your estate plan, take inventory of your assets. Create a list and include corresponding values for each item. You’ll also need to ask yourself who you want to leave your assets to and how you want to divide them. After you’ve decided all of the above, you can begin the following process:
Draw up your last will and testament. In it, you should name an executor, assign a legal guardian for any minor children and establish any necessary trusts.
Your will doesn’t account for everything. Now, you’ll need to review all your plans, accounts and shared assets to assign or update beneficiaries.
Assign a power of attorney and healthcare proxy to make financial and medical decisions on your behalf if you cannot.
Write a letter that includes any information that hasn’t been accounted for. This may include desired funeral arrangements or the bequest of sentimentally valuable assets.
Ensure that all documents are organized, properly notarized and stored someplace safe, like your attorney’s office or safety deposit box. This includes a list of your digital assets and passwords.
Estate planning is typically an ongoing process. While you should start estate planning as soon as you acquire assets, it likely won’t end there. You should review your estate plan every few years, whenever you experience a life-changing event or in the event that Congress makes any changes to estate tax law. This will ensure your plan reflects your current desires and goals.
How to Choose an Executor
In addition to drawing up your will and trusts, you’ll also have to choose an executor. Your executor will be responsible for administering your assets after your death and ensuring your final wishes are met. An executor’s duties may include:
Filing court papers to begin the probate process
Taking inventory of the entirety of the estate
Distributing assets to named beneficiaries
Filing final personal income tax returns
Paying remaining bills, including taxes and funeral costs
Often, people choose a family member, such as a child or spouse, to fill this role. You can also select a friend. What’s important is to make sure you pick someone who is dependable, trustworthy and organized. Also consider a person’s age and health, as you want your executor to be around after you’re gone. If your chosen executor lives in a different state, be sure to check your state’s laws as there may be requirements regarding an out-of-state executor.
Will I Need to Pay Estate Taxes or Inheritance Taxes?
Another big piece of the process is estate taxes. If you don’t plan accordingly, taxes can take a big bite out of your estate. Your assets can be taxed in two ways: estate taxes and inheritance taxes. With estate tax, the tax is taken out of the estate before it’s divided up and distributed to beneficiaries. Inheritance tax, on the other hand, is levied after the inheritance is distributed to beneficiaries. While estate tax is taken directly out of the estate, beneficiaries are responsible for paying inheritance tax.
Inheritance tax is only levied by states, but both the federal government and states may collect estate taxes. As of 2020, the federal estate tax only applies to estates worth more than $11.58 million. Here’s a breakdown of each tax on the state-level:
Estate Tax (13 states)
– Connecticut – Washington, D.C. – Hawaii – Illinois – Maine – Maryland – Massachusetts – Minnesota – New York – Oregon – Rhode Island – Vermont – Washington
There are steps you can take to mitigate the estate tax so more of your assets go to your beneficiaries. For instance, you can gift portions of your estate to your family ahead of time instead of waiting until you die to give everything away. Other tactics include setting up an irrevocable life insurance trust, making charitable donations, establishing a family limited partnership and funding a qualified personal residence trust.
Risks of Not Creating an Estate Plan
If you don’t come up with an estate plan, your state will take control upon your incapacitation or death. If you become disabled, the court will determine how your assets will be used to care for you through a conservatorship or guardianship. Similarly, if you die without an estate plan in place, your state will distribute your assets according to its probate laws.
As you might have guessed, these scenarios can have significant downsides, as you will lose control over who is in charge of your care or how your assets are distributed. If you have minor children, the court will take control of their inheritance. In the instance that both you and your spouse died, the court would appoint a guardian for your children.
In other words, estate planning is crucial no matter your age or level of wealth. You want to have a say in where your assets end up and ensure your loved ones are adequately cared for should something happen to you.
DIY Estate Planning vs. Hiring an Estate Planner
You can do estate planning on your own with thorough research. However, know that there are risks to DIY estate planning and it can be overwhelming. An estate planning professional, like a financial advisor or attorney, can help. A planner has years of education and experience, while you usually only do this once. Estate planning laws are very specific and vary state by state. One mistake and your whole plan could be invalid or work differently than you want.
As your estate grows in size, estate planning becomes more complicated and the need for a professional becomes greater. This is especially true if you have children under the age of 18 who would need to be provided for and taken care of. If you own a business, own property in more than one state or don’t have obvious heirs, an estate planner’s expertise will come in handy.
In addition to elucidating the process and taking work off your hands, an estate planner can help you save money. Federal and state governments tax your asset transfer through estate taxes. A planner can help you to mitigate or avoid these costs, as well as avoid probate and protect your assets from your beneficiaries’ creditors.
How to Find an Estate Planner
If you’ve decided you don’t want to handle estate planning alone, there are a number of ways to find a qualified estate planner. Both estate planning attorneys and financial advisors can be helpful in the process. Ideally, your financial advisor and attorney will work hand-in-hand to make sure you’re making the best estate planning decisions for your situation and have your assets in order.
A lawyer can help you with everything from creating a will and drafting living trusts to developing a plan to minimize estate taxes and preparing powers of attorney. To find an estate planning lawyer, check with the state or local Bar Association. Also take note of certifications, like the National Association of Estate Planners and Councils’ Accredited Estate Planner designation, which indicate expertise in the area.
Your financial advisor can also help you find a qualified attorney to draw up your estate planning documents. Additionally, a financial advisor can help you better define your objectives before legal documents are drafted and also ensure your estate planning documents align with your goals.
There are few financial endeavors that are more important than creating an estate plan. Having a complete and secure estate plan in place when you pass away will leave your loved ones in a much easier spot. Without an adequate estate plan, you run the risk of forcing your family into an extended trip to the probate courts, where they’ll undoubtedly incur legal fees and may not receive the full inheritance you intended for them.
DIY estate planning, with the help of estate planning software or websites, is an option for simpler estates. But you may be better off working with an advisor or an estate-planning attorney. If you go this route, do your due diligence, asking them about their practice, fees and background. One way to compare multiple financial advisor options is with SmartAsset’s advisor matching tool.
Estate Planning Tips
For many Americans, the prospect of planning out your entire estate can seem overwhelming and difficult. That’s where a financial advisor that specializes in estate planning can help. SmartAsset’s advisor matching tool can set you up with three personalized financial advisor options in just 5 minutes.
If you have a sizable estate, estate taxes on either the state or federal level could be hefty. However, you can easily plan ahead for taxes to maximize your loved ones’ inheritances. For example, you can gift portions of your estate in advance to heirs, or even set up a trust.
Becca Stanek is a graduate of DePauw University. Becca is an experienced writer/editor who serves as a retirement expert for SmartAsset. She’s passionate about helping people understand the sometimes daunting ins and outs of personal finance. Becca is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. Her work has also appeared at Time, The Week, Mic and The Washington Monthly. Becca grew up in the Midwest and now lives in New York City.
For a very long time, estate plans didn’t change much. Traditionally, they have been paper documents that spell out a person’s wishes regarding property, executorships’ responsibilities, funding of trusts, and so forth, that were spelled out in wills, trusts, powers of attorney, health-care proxies, and perhaps invoking the Homestead Act. (The Homestead Act is a document that can be added to your personal residence’s deed, to gain limited protection to the equity in your home). While all these documents still represent the foundation of a modern-day estate plan, the Internet has added a whole new dimension to the process.
Online banking, employer financial plans, investments, and even tax returns can now be accessed with the click of a mouse. While everyone enjoys the convenience of the Internet, big problems arise if a decedent hasn’t informed survivors about critical information such as URLs, passwords, and PINs.
I recently heard a story of a woman whose husband handled the finances for the family. Upon his death, she didn’t know anything about his stock options with his former employer. She subsequently lost over $19,000 because the options expired without her exercising them. I’m sure that $19,000 would have come in handy to pay the funeral expenses. Don’t let this situation happen to you. Make sure you store all pertinent information in a safe place and that your executor or heirs know where to find it.
Furthermore, with the popularity of social networking these days, have you ever thought about what happens to your online presence upon your death? Facebook, Linked In, and Twitter all have specific policies in dealing with this situation. Facebook allows friends and family members the option of either “memorializing” the profile or removing it entirely. Memorializing the profile allows it to be viewed by those whom the account holder had confirmed as “friends.” Friends may post on the deceased person’s wall, but can’t log into the account. Removing the profile entirely may only be done by an immediate family member. To learn more, go to Facebook’s website and search for “How Do I Report a Deceased User or an Account That Needs to be Memorialized?” Keep in mind that you will need proof of death, such as an obituary.
Twitter users can email firstname.lastname@example.org or contact them via fax at (415)-222-9958. They will need the deceased’s user name or a link to the account profile page. A link to an obituary or news article is acceptable as well. Twitter accounts can only be removed, not left as memorials.
You can contact LinkedIn via fax at (402)-715-4536 or via their website. A “Verification of Death Form” must be completed and submitted. You will need the account holder’s e-mail address, URL of their LinkedIn profile, date of death, and an official death notice.
Blog services’ policies vary from service provider to service provider, so check their policies for removing a deceased user’s accounts. Usually the blog’s URL and the URL to the login page with the username and password should be a good start.
All documents and information should be kept in a safe place and someone you trust should be aware of how to access the data upon your death or incapacitation. Preferably it should be stored electronically, encrypted, and with a redundant back-up in the event a disaster recovery is needed.
Here is a checklist of important items: 1. Professional advisor’s contact information 2. Will 3. Insurance policies 4. Banking, savings, and investment statements 5. Property deeds 6. Retirement plan documents 7. Estate planning documents 8. Online presence information, i.e., user names and passwords
As you can see, in today’s digital age, this is not your grandparent’s estate plan. By taking some simple steps, however, you can make sure you, your family, and your assets are protected.
Most clients and advisors are acutely aware of the value of a thoughtfully designed estate plan that provides for the eventual disposition of a client’s tangible and financial assets. Despite this, even the most carefully constructed estate plan often overlooks a client’s digital assets.
In today’s society, almost all clients are active online, and may have substantial digital assets with both sentimental and monetary value even if they do not realize that this is the case. Without a clear plan that specifies the client’s wishes, however, both state and federal laws can create roadblocks to accessing digital assets—making it critical that the client include digital assets in any comprehensive estate plan in order to ensure an orderly post-mortem disposition that carries out the client’s wishes.
Uniform Laws Governing Digital Assets
The concept of estate planning for digital assets actually covers an extremely broad range of online assets, ranging from email accounts and social media to PayPal, domain names, intellectual property stored on a computer and virtual currency. While some of these accounts are likely to have only sentimental value, domain names, blogs with advertising and business contact lists contained in email accounts can have monetary value, as well.
Without a clear estate plan contained in legal documents, data privacy laws can prevent the online service provider from allowing the client’s executor or family members to access his or her online accounts. The Uniform Fiduciary Access to Digital Assets Act, which has been passed in most states, provides that an owner of digital assets can specify who will be able to access and dispose of any digital assets after death.
Absent proper planning, the online provider’s terms of service agreement (TOSA) will often control what happens to the account after death. In some cases, this TOSA can even override the client’s specifications that are contained in a will or other document, especially in cases where the service provider provides specifications as to how the account owner can make his or her post-mortem wishes known.
For example, Google provides an “inactive account manager” function that allows the account owner to specify what should happen to the account after it has remained inactive for a period of time. The account owner can list beneficiaries who will be notified that the account will be closed before it is deleted, giving beneficiaries time to download any content contained in the account.
It is important to remember that the instructions the client leaves in his or her online service provider’s tools will trump instructions left in the will, so it is important to include this document among those that should be regularly considered and updated.
An Action Plan for Digital Estate Planning
After a client determines who should be allowed access to his or her digital assets after death, it is important to takes steps to ensure that the heir is able to access the relevant data. Importantly, the client’s will, trust documents and other legal documents should specify a digital fiduciary or executor who will be able to access any given digital asset after death, and should also provide that individual with the ability to reset or recover the client’s passwords.
In order for such a plan to be effective, the client should be advised to make a comprehensive list of his or her digital assets during life, which should also include instructions as to how the appointed person can access those assets after death. To facilitate easy access, the client should list usernames, passwords and the security questions associated with the account password. This information should be stored securely, but should not be included in the client’s actual will, which can be accessed by the public after death.
Depending upon the type of digital assets involved, clients may find a virtual asset instruction letter valuable in their digital estate planning. This letter sets forth all relevant information as to digital accounts and assets to allow the digital fiduciary access (or instructions that certain accounts should be deleted).
Clients should also be advised to regularly back up their digital assets on the cloud or another device, both to protect those assets from a device malfunction but also to allow easier post-mortem access to a digital fiduciary.
A client’s digital estate plan will vary in complexity depending upon the type of digital assets involved. Many clients may be unaware that their digital assets hold monetary value, so it is important that the advisor discuss disposition of digital assets with all clients, even those who do not initially foresee the need for digital estate planning.
Digital property is increasingly becoming a more important part of estate planning. Individuals should consider their digital property, in addition to their tangible assets, when finalizing and reviewing their estate plans.
A person’s digital property and electronic communications are referred to as “digital assets” and the companies who store those assets on their servers (Google, Facebook, Apple, etc.) are referred to as “custodians.” Digital assets are typically governed by terms of a service agreement — not by property law. These service agreements are unhelpful when a user passes away or becomes incapacitated. As the number of digital assets we have increases daily, so does this growing issue. To address this, many states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (UFADAA), which allows a fiduciary the legal authority to manage another’s property and specifically allows Internet users the power to plan for the management and disposition of their digital assets.
Digital assets should be included in your normal estate planning and wealth transfer conversations with your estate planning attorney and family members. Your estate planning attorney may create an amendment to your existing will, trust, or power of attorney to give the designated agent the authority to direct or dispose of your digital assets. This amendment may take the form of a Virtual Asset Instruction Letter, which allows you to list accounts, instructions for those accounts, and the person(s) designated to access them.
Digital assets, while not always tangible, can be very valuable. For example, airline miles and hotel points have obvious monetary value, while photos, emails, and other creative works have sentimental value. As a result, it is important for individuals to have a plan for photos, email and social media accounts, financial accounts, and online memorabilia and documents.
Please contact us to request additional resources on creating a digital estate.
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